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How to calculate the cost of employee turnover

Not long ago, it was common for employees to stay with the same company for their entire career. Today’s average worker stays at his or her job for 4.6 years, according to the US Bureau of Labor Statistics. Generational differences and a competitive job market play a role in this shift.

It’s important for organizations to understand the costs of turnover and take steps to reduce it. While there is going to be turnover no matter what you do, not working to improve retention can be an expensive mistake.

Calculate the costs of turnover
Unfortunately, many companies are in the dark when it comes to calculating turnover. Most realize that it is expensive, but many do not understand the actual costs. There are fixed costs, such as advertising fees to find a replacement and overtime pay to cover the vacancy, and these are relatively easy to calculate. Soft costs – such as the administrative time to find a replacement and lost productivity – are often overlooked.

Both types of costs make a big impact on the health of your organization – financially and culturally. To begin to understand the cost of turnover within your organization, use the following list:

Separation Costs

  • Administration processing, including paperwork, COBRA processing, and payroll changes
  • Transition meetings, including exit interview and management meetings
  • Overtime costs and/or temporary help to cover vacancy

Recruiting Costs

  • Advertising for replacement
  • Interview time and expenses
  • Background checks, credit review, drug tests, etc.
  • Signing bonuses and other new hire perks

Onboarding Costs

  • Administrative costs to set up orientation
  • Orientation time and expense for new hire and HR
  • Training time and expense for new hire and trainers
  • Lost productivity during training

Hidden Costs

  • Client issues due to turnover
  • Missed deadlines
  • Knowledge loss
  • Disrupted operations
  • Cultural ramifications

When you add up all of these expenses, you will have an idea of how much it costs for your organization to replace an employee. Multiply that figure by the number of employees who leave within a year to determine your organization’s annual turnover costs. The figure can be quite shocking!

Turnover costs vary with each organization and position. According to the Society for Human Resource Management, research suggests that replacement costs can reach as high as 50-60% of each employee’s annual salary, with total costs associated with turnover ranging from 90-200% of annual salary.

Diagnose and resolve problems
Before you can create a strategy to improve retention, you need to diagnose the problems causing turnover and implement solutions. To reveal core issues within your organization:

  • Communicate with employees. When employees leave, conduct exit interviews to learn how they perceive the culture and, most importantly, why they want to leave. Likewise, periodically meet with your current employees to gather feedback.
  • Review voluntary and involuntary turnover. When looking at involuntary turnover, ask yourself: Could we have done a better job at hiring or training? Was it unavoidable (i.e. business necessity, layoffs)? For voluntary turnover, look for trends in why people chose to leave your company. Are there geographical trends? Did employees report to a common manager?

Create a retention strategy
In addition to creating solutions to problems causing turnover, you need a proactive plan to achieve and maintain employee retention. Keep the following steps in mind as you create your strategy:

  • Benchmark your turnover rate by reviewing how many people have left your organization within the last year. This will allow you to better measure the results of your retention efforts.
  • Determine what rate of turnover is acceptable for your organization. Not all turnover is avoidable – and some can even be healthy for your organization. Set reasonable quarterly and annual goals.
  • Invest in your culture. To attract and retain today’s top talent, you must cultivate an engaging, meaningful work culture. If you have a strong culture and a clearly defined career path to keep talent challenged, employees will be more likely to stay.
  • Use proven retention strategies. There are a number of retention tactics you can implement today for little to no cost. It is also helpful to consult a hiring expert for personalized advice to suit your unique workforce.
  • Evaluate your results. Track your progress and overall savings to determine if you are seeing a return on your investment. Adjust accordingly.

Plain and simple: turnover is expensive. It can’t always be prevented, but investing in employee retention and developing people within the organization is proven to be cost-effective. With a proactive retention strategy, you’re one step closer to a lower turnover rate and a more motivated, productive workforce.

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